Who Should Use Balloon Payments?
Because of the housing crash of the mid 2000s, most residential home loans are quite conservative and straightforward. But every now and then there are still nontraditional loans, and one type that is somewhat popular is the balloon payment loan. While a balloon payment loan can be tempting, you should know in advance what the downfalls or risks can be, using this kind of loan.
Regular Loans vs. Balloons
In an ordinary loan, your payments are spread out evenly, so that the loan, and interest, are both paid off at the end of the loan. So, take out a ten year loan, and your loan will be paid off completely in 120 months. Your loan payments are about the same, absent minor adjustments for changes in interest rates.
But balloon payments work a bit differently. At the end of the loan term, whether it’s 5, 10 or even 30 years, your loan won’t be paid off. Rather, you will have one lump sum balance, that will be due all at once, at the end of your loan (the balloon payment).
That balloon payment is just deferred principal, all being saved up until the last final payment. That balloon can be quite large, and it is the last payment. It is just like any other payment: if you miss it or can’t pay it, you will end up in foreclosure. That’s right—if you can’t make the very last payment, after years of timely payments, you could lose the property.
You may have the option to refinance the property before the balloon payment, into a more traditional loan. But you would have to plan ahead for that, have the credit, and sufficient equity in the property.
Most traditional home loans don’t have balloon payments. They are mainly used in commercial loans, but some residential loans from private or nontraditional (non-bank) lenders may have them as well.
Benefits and Who Should Use Them
There are some benefits to balloon payment loans, for the right people.
Because so much of the principle of the loan balance is paid at the very end, it means that the regular monthly payments are smaller than they would be with a traditional loan. This may be good for businesses, as it may allow them more working capital during the life of the loan.
It may also be good for people who are looking to hold property and then flip it within a short amount of time—the smaller payments mean that less cash must be put out while you are holding the property.
Someone who is expecting a large payment in a few years, perhaps from a bonus, inheritance, or some other source, may benefit from a balloon payment, if the timing of the receipt of the money coincides with when the balloon payment is due.
Make sure you understand the terms and conditions of the paperwork you are signing at your real estate closing. Call a West Palm Beach real estate lawyer at The Law Offices of Larry E. Bray today for help today.